Downtown L.A. office rents tumble more than 30%: but high-rise towers ride out quake with little damage.

Downtown Los Angeles commercial buildings emerged from the Jan. 17 earthquake basically unscathed, industry sources said. "They (downtown high-rise buildings) are supposed to survive earthquakes, and they did," said Hayden Eaves IV, a broker with the downtown office of Cushman & Wakefield of California Inc. Some older commercial structures did sustain damage, but even most of that was not devastating.

Additionally, many real estate sources said they are encouraged by the fact that Metro Rail and Metro Link trains, stations and rail lines in downtown L.A. were undamaged by the quake.

Downtown L.A.'s weathering of the quake likely comes as heartening news to commercial landlords and tenants alike. But particularly heartening to downtown tenants, and disheartening to landlords, is the fact that average office rental rates in downtown Los Angeles plummeted by more than 30 percent in 1993, making it one of the lowest-priced markets in the Southland, according to commercial brokerage firm Grubb & Ellis Co.

Downtown L.A., with monthly rental rates of from 90 cents to $2.70 a square foot, now offers cheaper rents than all but two other L.A. County office markets -- the Los Angeles International Airport area and the Mid-Wilshire district, pointed out Bob Caudill, managing director of commercial brokerage firm Caudill & Co.

And the decline in downtown L.A. office rents was not limited to lower-quality buildings, either. Downtown rates declined for every class of office property by an average of nearly 8 percent for each quarter during 1993. Several real estate sources cited these bargain rents as a factor that might promote more leasing activity in the downtown market in the year to come.

Caudill said that the low rental rates are providing tremendous opportunities for firms looking for quality space at low prices. "People are starting to realize that they have to move fast to take advantage of these opportunities," said Caudill.

Stephen Bay, branch manager of brokerage firm Julien J. Studley Inc.'s downtown Los Angeles office, said that the rental rates are not only low when compared with rental rates in other parts of Los Angeles County. In terms of overall concessions and rent, he said, downtown Los Angeles represents one of the best markets for companies shopping for quality space. That is good news for the tenants, but not so good for the landlords.

"Downtown Los Angeles landlords are having to do the worst deals in the country -- of the markets that we track," said Bay. Given that landlords are barely covering their costs, Bay predicted that rents should stabilize because there is simply no downward room.

A number of real estate sources said that while the decline was quite dramatic, it was not true across the board in the downtown region. Ray Lepone, a broker with the downtown office of Grubb & Ellis, stated that rental rates for some buildings have declined even more than the eight percent per quarter average. Other rental rates, in the first generation space category, have remained at a much higher level. Even those, he said, did experience a decline of "probably in the range of 10 percent."

Direct vacancy rates continue to hover around 20 percent, according to Grubb & Ellis.

But that figure significantly understates the true softness of downtown L.A. because it does not factor in the flood of sublease space pouring onto the market.

Once sublease space is added in, downtown L.A.'s office vacancy rate jumps to 26.6 percent, according to brokerage firm Cushman & Wakefield of California Inc. Office leasing activity, fueled by the bargain rental rates, was respectable during 1993. But it was certainly nothing to write home about.

By year's end, the downtown office market had experienced "net absorption" of 680,000 square feet. In other words, 680,000 more square feet of office space was leased than vacated over the past 12 months. Although that figure is well off the awesome 1 million square feet of annual net absorption that was occurring during L.A.'s boom years, it was not bad considering that downtown firms continue to dump empty space on the market.

In October, one of the country's largest law firms, Baker & McKenzie, announced it had decided to shut down its Los Angeles office. Baker & McKenzie is scheduled to move out of Citicorp Plaza's 777 Tower by the end of this month. That departure is adding another 100,000 square feet of office space to the downtown market.

Another law firm, Buchalter Nemer Fields & Younger, on Dec. 1, 1993 vacated two of the five floors it leases at Sanwa Bank Plaza. That downsizing threw a total of 41,610 square feet of office space on the market.

Eaves predicted that more law firms will be putting downtown L.A. office space on the market in the first six months of 1994.

However, it is not only law firms that are expected to dump available space on the downtown office market this year. During the fourth quarter, IBM announced that it will also be vacating a minimum of 300,000 square feet of downtown L.A. office space during 1994. Stephen Bay pointed out that the IBM announcement is only one of several important companies which may be moving out of space in downtown L.A. during 1994.

He said that downtown's office market will "continue to feel the impact of corporate consolidations during the year to come." Security Pacific Bank's former office space, for example, will be opening up in 1994. Real estate sources continue to speculate about whether or not Times Mirror Co. will move into part of the nearly 500,000 square feet of office space that is being deserted by BankAmerica Corp., which bought out Security Pacific several months ago. Even if Times Mirror makes the move, sources said, it would only occupy about 350,000 square feet, leaving the remaining 150,000 square feet up for grabs.

Also, BankAmerica announced that it will not be exercising its renewal at One California Plaza. Although the lease is not scheduled to expire until 1995, Bay stated that the landlord is likely to start marketing the property in 1994. BankAmerica presently leases between 140,000 and 160,000 square feet there, according to Bay.

The most important downtown L.A. transaction of 1993, according to several real estate sources, was the sale of the WCT Tower at 1100 Wilshire Blvd. Eaves called it the "most important deal in three years."

Likewise, Joe Faulkner, a broker with CB Commercial Real Estate Group Inc. in downtown Los Angeles, noted that the WCT deal was definitely good news for downtown. "When people talk about downtown, the subject of WCT always came up as evidence of the failure of downtown," said Faulkner. He added that the sale should remove the stigma of the "other side of the Harbor Freeway" being a blighted area. The WCT building is west of the Harbor (110) Freeway, while downtown's Central Business District is east of that freeway.

Faulkner is the broker hired to find a buyer for the Watt City Center site, which was put up for sale during the fourth quarter of 1993. He stated that he is encouraged by the sale of WCT, which may make the sale of the Watt site more viable. The asking price for the 6.5-acre parcel of fully entitled Watt land is $50 million.